Before you read on, let us set the expectations first. This post is not about the next big investment idea, or does it explain a groundbreaking investment strategy that you haven’t heard of before. This post is about a few simple thoughts that build a strong foundation for your investment journey.
Many tend to easily forget about some simple rules when the excitement of an investment opportunity kicks in. Investing in real estate, equities, mutual funds and many other asset classes can be for everyone as always widely advertised by local investment advocates. Just make sure you don’t forget the basics of investing.
Investing is not easy but it does not need to be difficult and complicated, either. Often, investors look for riskier and more complicated strategies once their existing portfolio doesn’t yield the right results anymore. This is where people lose control over their investments and returns tend to diminish. Warren Buffett, unarguably one of the most successful value investors in the world, once said that, “successful investing takes time, discipline and patience. Some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”
Take the Philippine Stock Exchange (PSE) as an example. Investing in local equities can be a great strategy if you are fully aware of its ups and downs, but the multiple times where investors made north of 20 percent annual return by buying into local blue chip companies are over.
If you pick a new stock to invest in, also make sure that you know as much about the company as possible. Too many local retail investors choose stocks based on market rumors and on recommendations. A common misconception in the local market is that you don’t need to understand the trade but just need to follow my expert friends or financial adviser.
While you might get a few good investments, there is a high chance that you don’t know what to do when the difficult times come. Use the internet to your advantage and do your own research, but keep in mind that as a small retail investor, you will never have as much information as bigger institutional investors and brokers do, given their direct access to these companies.
In order to reach your first million pesos from your investments, it would be helpful to recall a concept that Albert Einstein once called the eighth wonder of the world, which is compound interest. It is the most powerful investment concept but is not easy to apply as it takes time, patience and a strong belief that it works.
During periods of years or even decades, it’s not easy to keep your eyes set on the long-term results and stick to your initial plan of using a simple investing strategy and the power of compounding. The Philippine economy has been growing by more than 6 percent per year on average and so should the PSE and its stocks. However, patience is required and an eye on the long-term strategy.
The younger you are, the more important becomes time as a factor in your investment success. If you are in your 20s, it is safe to assume that you are going to have active sources of income and most of your savings can be invested for very long time horizons, as most likely you won’t need them until retirement, provided that you have insurance to cover for the unexpected and you plan for big cash-flow hits, such as marriage and the purchase of your first house.
So why is time such an important asset? It’s because of most asset classes, equities in particular tend to go up in the long run. At the end of the day, you are lending money to companies for them to be able to grow and create more value to their shareholders. Even if you have invested in the S&P 500 during the peaks in 1999 before the dotcom bubble, or in 2007 before the global financial crisis, you would still come out fine today after 17 years and nine years respectively. You might not get the best returns, but you would come out fine.
Legendary investor Benjamin Graham once said that, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.
So how do we apply the factor “time” to the local bourse? Start by understanding what you are investing in. Let’s take the recent acquisition of 2GO by a consortium led by the SM group. If you were one of the few that knew about this transaction before it was announced, when in fact, it was already in the news days before it was officially announced, you had a great chance to make a few bucks within a few trading days. But for everyone else, start by looking into why SM is interested in a logistics company such as 2GO.
Often, the rationale is less complicated than you might think and it is in line with a bigger company’s strategic direction. If you think that SM has the right systems in place and the expertise required to be a leading logistics player, then 2GO might be the right buy for you. Keep in mind that time is again a very important aspect of building an integrated logistics player, which might take decades. Take DHL in Germany as an example of this scenario.
More than anything else, increasing your savings matters. As strong as the power of compounding can be, if your capital is not significant, the amount that can be compounded on is not large and the effect would not be significant.
Before you start investing, cut down on your unnecessary expenses to begin with a larger amount. Foregoing that cup of P150 latte every day or reducing the number of beers that you have during the weekend can make a huge difference. While this seems to be the most obvious advice, even very smart investors easily forget about this.
The Philippines is a country driven by consumerism, heavily advertised by the mainstream media.
This is per se a good thing for the economy, assuming people can actually afford what they buy. However, the downside of this is the popular behavior of buying expensive items through financing and installment options. There are still too many customers who default on their payments and end up in a vicious cycle of paying back debt. Instead, increase your savings, invest wisely, and buy the new phone when you can actually afford it.
If you really want to grow your wealth, focus on saving and building up the size of the initial investment. In the meantime, take action and study the market, stocks, real estate opportunities, or any other investment you might be interested in. By the time your initial investment is big enough, you already know the best way and best angle to place your money.
Moritz Gastl is the managing director of MoneyMax.ph, a financial comparison website aiming to help Filipinos save money through diligent comparisons of financial products.